Question

Question 1

(a) Name three main valuation approaches.

(b) What are the differences between Discounted Cash Flow Valuation and Relative valuation?

(c) Discounted Cash Flow Valuation tends to work best for investors who:

(d) Relative Valuation tends to work best for investors who:

(e) “A valuation model is an objective search for true value”. Do you agree? Briefly Explain.

Answer 1

Answer to A -

Ther three types of valuation methods are as follows:-

1) Dicosunted Cash Flow Method

2) Compartive analysis method or Relative Valuation

3) Comparable Transaction Method

Answer to B -

Discounted Cash Flow Method Vs Relative valuation

DCF Method	Relative Valuation
It uses Company's Cash flows to compute the valuations. It does not rely on market competetiors data or similar players data	It uses other players information and peers data to compare and assess teh valuation of subject company.
It assumes that company's cash flow rather than accounting figures would help in valuation of subject company.	It assumes that other similar peers opertaing are perfectly or accurately valued.
It is based on the principal of present values whereby the value of asset = Present values of all future monetary benifits.	It is based on law of one price whereby similar assets should sell at similar price.

Answer to C

Industries where income, Capital expenditures and growth are stable and can be easily forecasted tend to use the DCF method of valuation. For eg Banks, Oil, Gas, Etc. where the cashflows are stable and can be predicted.

DCF Valuation tends to work best for investors who

1) Can predict the future cash flows, capital expenditures

2) Can predict and model the growth rate in to the the valuation model itself.

Answer to D

Relative Valuation tends to work best for investors who

1) can find and value other similar players in the market and where Markets are priced perfecty.

Since no two assets are same an investor who can duly incoporate such difference and adjust the same in the valauation figures accordingly should use the Relatove valuation method.

For eg valauation of Real estates, Pizza Hut Vs Domiono's. etc.